How do I pay a large amount of money on my student loans?

September 1, 2006 7:16 AM

I have a surprise chance to pay off my student loans (!), so how do I go about doing this in the way that's best for me? My "more inside" has a few details about possibilities / ideas.

I got money from a relative's will that is to be used only to pay off my student loans. I'm intensely grateful for this chance, and now I'm just figuring out how to handle it in the most practical way.

So what is the best material way to pay my two loan holders (Sallie Mae and the US Dept. of Education) in the way that's most beneficial to me -- such as via a card that gives a small amount of cash back, because any cash would be really helpful to me.

I have my paypal debit card that I use for all my everyday stuff because it gives me 1.5% cash back. (1.5% cash back would be over $700, given this amount I'm paying to the loans.) But my cash limit on that card is only $400 a day, and at that rate I would be paying them every day for 3.5 months (over which time my loans would increase in interest enough that it might not even be worth it?).

I have poor enough credit that I can't get another credit card with a higher daily limit right now.

Is there something I'm not thinking of (I know very little about money) that is a way to get 44K total to my two loan holders and get some kind of cash back? Should I see if my mom (who has good credit) can get some cash-back credit card, so she can do the payments? If so, what card should she get??

I am not at all used to dealing with money correctly, so any help would be hugely appreciated. If it matters, the money was not officially willed to me but to my mom (nothing was willed to me), and the agreement is that from that I get the amount of money that will directly pay off my student loans. Also, student loans are the only debt I have, if that matters.

posted by anonymous to Work & Money (19 answers total)

I have no idea what your interest on the loan is, but would it be worth investing for (say) six months in something pretty solid (like a GIC), then using the principal to pay off the loan, and keep the interest?
posted by dirtynumbangelboy at 7:19 AM on September 1, 2006

My 2 cents: nothing is going to give you greater joy than to just send the money in, get them paid off, and be done with it.

I think you're going to find that 6-month CD rates, which is probably the best no-risk 6-month investment that you can do, will not exceed the interest rate of your student loans, or at least be such a small margin it's not worth the paperwork.

Pay 'em off and then buy yourself something with booze in it to celebrate.
posted by mcstayinskool at 7:25 AM on September 1, 2006

also, don't do anything with risk involved with this money. we're talking about paying off your debt, not excess money that you can stand taking a loss on...
posted by mcstayinskool at 7:27 AM on September 1, 2006

Depending on the interest rate of your USDOE loans, the best thing might be to NOT pay it off. My government loan rate is less than 2%. You can make 5% easily in conservative investments. But if you aren't disciplined with money, then pay it all off now.
posted by dpx.mfx at 7:29 AM on September 1, 2006

Does the will stipulate *when* you have to pay the loans off? If not, put the money in a money market account or just a plain vanilla savings account at a bank. Take the 3-5% interest you are making on the money (which will be around $1,500 a year) and pay your loans with that amount each year for the next 20? 30? years. When the loans are completely paid off by the interest you will have the original $44,000 in the bank account free and clear. Obviously if you get tired of this you can just take the entire cash amount and payy the whole loan off whenever you want.
posted by iurodivii at 7:29 AM on September 1, 2006

I doubt you're going to be able to make money off of it, since you can't make money through just a transfer alone -- like dirty said, the money would have to sit in a interest bearing account or be invested in some way. You're unlikely to see a rate of short term growth that outpaces the interest charged by sallie mae (the rates recently went up from 2.x% to 3-4% I believe).

The government loan might be interest-free. I could be wrong, but I'm paying off a grant that I disqualified myself for (changed majors) from my state and I don't think I pay interest on it.

So if you've got one interest loan and one non-interest loan, you could:

1. Pay off the sallie mae loan asap
2. Put the remaining money in an interest bearing checking account
3. Use that account to pay monthly payments on the gov. loan

While the government loan is being paid off, you'll be accruing interest on all the money -- making the most of the money you can't save.
posted by cowbellemoo at 7:33 AM on September 1, 2006

dang, dpx beat me. curse my longwindedness!
posted by cowbellemoo at 7:33 AM on September 1, 2006

If, as you say, you have bad credit, then I'm also guessing you're bad with money. Best bet is to pay off everything ASAP. This will help your credit score. You may miss out on at most a few hundred $ you might have been able to get were you to finangle some credit-card deal, but many times these cash-back structures are written with rules to prevent exactly the kind of thing you're looking to do.

After that, I'd suggest getting a card (I use my corporate amex) and using it to put every possible expenditure you make on your card, and pay the balance off every month. You'll have an accurate record of what you spend each month, and you'll be earning valuable points for each dollar. This is huge for your credit score as well, and if you're starting this from a position of zero student debt, you'll be in fine shape.
posted by allkindsoftime at 8:02 AM on September 1, 2006

You may want to attempt to negotiate for a lower amount for payoff. I've had a rocky road in repaying student loans, although I've been back on the path of righteousness for over two years. I have about $50k in loans with the state of TN, and they offered to take $38k to settle the debt. Too bad don't have $38k.
posted by kimdog at 8:29 AM on September 1, 2006

Actually, if you're bad with money, but disciplined enough to just stash the money in an account and let autopay take care of your student loan payment, that might be better for your credit history in the long run + giving you the interest.
posted by jzb at 9:03 AM on September 1, 2006

I was just about to say what jzb said -- keeping the debt, but showing that you can submit payment regularly w/o any complications is actually better for your credit.

Anonymous -- you didn't tell us if your government loans are consolidated or not, but if they are consolidated at a rate lower than what you could get on, say, an INGDirect savings account, then it makes more sense to put the money away (or buy staggered CDs) and pay off your loans regularly. For example, my student loans are consolidated at 2.85% (I got lucky!) but I earn close to 5% on my savings account alone, which means that I'll make more money by keeping my cash in the savings account and paying the minimum monthly payment on the loan as long as my savings account interest rate stays above 2.85% -- this is similar to what you are thinking about doing with a cash back credit card. If you haven't consolidated your loans, look into what your interest rate would be if you did so now (you'll only be able to consolidate the government loans, not any private loans) and if the interest rate is lower than that on an online savings account, consolidate and go back to the top of post! But first, pay off your private loans or anything with an interest rate higher than what you'd get from an online savings account or through staggered CDs.
posted by echo0720 at 9:54 AM on September 1, 2006

Doing something to improve your credit score is probably a bad idea. Given that you've had problems in the past you may do well to swear off debt, which makes a credit score useless information. That the money was given to you to pay your student loans, you'd better just do that. Call them, tell them you want a payoff amount. You avoid paying a great deal of interest.

Oh, and since you've found someone to bail you out, DON'T SCREW THIS UP! You may not get another chance.
posted by kc0dxh at 10:30 AM on September 1, 2006

This money has been given to you for the express purpose of paying off your student loans. Do so ASAP.

Call up the lenders, ask them where to send the cheque, and send it in.

The money wasn't given to you so that you could invest it, and hopefully come out further ahead at some point in the future. It wasn't given to you so that you could milk a few bucks out of a "cash back" scheme. It was given to you so that you could pay off your loans. There is no complicated "money management" here. Use the money as it was intended, and pay off the loans. End of story.
posted by gwenzel at 10:58 AM on September 1, 2006

This is pretty important: When you send in any big payment, be certain to specify that you want the payment to go towards paying off the loan's principal. If you don't specify, they'll purposefully assume that you're preemptively paying future bills. That is to say, you sent in big ass check and your loan sits there and they don't bill you for X years. After X years pass, you're back where you started.
posted by Skwirl at 10:58 AM on September 1, 2006

I can't think of a better answer to your specific question of whether there is a way to get "cash back" or similar rewards by using this money to pay off loans. If your mom or someone else you know has such a card with a high credit limit, it's worth exploring using it to pay the loans in whole or in part. But do some homework first -- some cards may have a cap on how much cash back you get. The banks may have anticipated this sort of thing and acted to prevent you from getting relatively easy money.

Most of the answers above assume that you have some flexibility in how you use the money. If this is true, one thing I would add to the "save it" answers is that you should be sure to account for income taxes. If your loans are at 3.8% and you can get 5% in a money market, that sounds like a good deal. But if you have a 25% effective tax rate, you only keep 3.75% from the money market, so you don't actually benefit from saving. Whether this approach makes sense really depends on your tax bracket, your loan interest rates, and your eligibility for high-interest savings accounts. Based on the description of your situation, though, it sounds like you don't have this flexibility.
posted by brain_drain at 11:59 AM on September 1, 2006

Also, make sure you follow Skwirl's advice.
posted by brain_drain at 12:01 PM on September 1, 2006

Response by poster: jdroth! Paging jdroth!

You better look at the exact legal wording of the inheritance before you start messing around with investments and whatnot--you don't want to lose this.

If I were you, I'd pay it all off. It's why you were given the money. Don't worry about how to do it--just pay off the principle and do it. The longer you wait, the worse your credit score looks and the more you have to pay.
posted by Anonymous at 12:06 PM on September 1, 2006

My loan holder doesn't accept credit card for payments (unless you're past due); I'm assuming they wish to avoid merchant fees. It looks like Sallie Mae is the same way:

Payment by credit card
Credit card payments are accepted from Sallie Mae’s Federal student loan borrowers (Stafford and PLUS) if a payment is 60 days or more past due, and from private loan borrowers if a payment is 16 or more days past due. Other circumstances where a credit card payment is acceptable: past-due borrowers who are in the military and are currently deployed, and borrowers who reside in a foreign country (including APO/FPO addresses), regardless of whether the borrower’s account is current or past-due. This applies to both Federal and private loan borrowers.
posted by neda at 3:35 PM on September 1, 2006

anonymous says:

I'm the original poster (replying through mathowie) and I want to thank everybody for the kind advice, especially the advice about negotiating lower settlement amounts. I didn't know you could just ask the loan companies to do that, and it jumped out at me as clearly the best solution once I read this thread. So I've now arrived at settlements with both of my loan holding companies (28% less, in one case -- so my two reduced settlement amounts mean that I'll save way more money than I could have made, relative to the loan interest, with any but the most wildly lucky investments). To answer the questions about the will, this was not any kind of formal instruction in the will saying what should be done with the money, just a personal/oral agreement (which of
course I think is equally important to follow). Thanks again and Viva Metafilter!!

posted by mathowie at 10:35 PM on September 6, 2006